EXHIBIT
      10.1

    PURCHASE
      AGREEMENT

     

    THIS
      PURCHASE AGREEMENT (“Agreement”) is made as of the 25th day of June, 2008 by and
      among Precision Optics Corporation, Inc., a Massachusetts corporation (the
      “Company”), and the Investors set forth on the signature pages affixed hereto
      (each an “Investor” and collectively the “Investors”).

    


    Recitals

    


    A. The
      Company and the Investors are executing and delivering this Agreement in
      reliance upon the exemption from securities registration afforded by the
      provisions of Regulation D (“Regulation D”), as promulgated by the U.S.
      Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933,
      as amended; and

    


    B. The
      Investors wish to purchase from the Company, and the Company wishes to sell
      and
      issue to the Investors, upon the terms and conditions stated in this Agreement,
      (i) $600,000 in aggregate principal amount of the 10% Senior Secured Convertible
      Notes in the form attached hereto as Exhibit
      A
      (the
“Notes”), which Notes are convertible into 12,000,000 shares of the Company’s
      Common Stock, par value $0.01 per share (together with any securities into
      which
      such shares may be reclassified the “Common Stock”), at a conversion price of
      $0.05 per share (subject to adjustment as provided therein), and (ii) warrants
      to purchase an aggregate of 7,920,000 shares of Common Stock (subject to
      adjustment as provided therein) at an exercise price of $0.07 per share (subject
      to adjustment as provided therein) in the form attached hereto as Exhibit
      B
      (the
“Warrants”); and

    


    C. Contemporaneous
      with the sale of the Notes and the Warrants, the parties hereto will execute
      and
      deliver a Registration Rights Agreement, in the form attached hereto as
Exhibit
      C
      (the
“Registration Rights Agreement”), pursuant to which the Company will agree to
      provide certain registration rights under the Securities Act of 1933, as
      amended, and the rules and regulations promulgated thereunder, and applicable
      state securities laws.

    


    In
      consideration of the mutual promises made herein and for other good and valuable
      consideration, the receipt and sufficiency of which are hereby acknowledged,
      the
      parties hereto agree as follows:

    


    1. Definitions.
      In
      addition to those terms defined above and elsewhere in this Agreement, for
      the
      purposes of this Agreement, the following terms shall have the meanings set
      forth below:

    


    “Affiliate”
means,
      with respect to any Person, any other Person which directly or indirectly
      through one or more intermediaries Controls, is controlled by, or is under
      common control with, such Person.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    “Amendment”
means
      an amendment to the Company’s Articles of Organization implementing a
      one-for-six reverse split of the Common Stock and maintaining the number of
      authorized shares of Common Stock at 50,000,000.

    


    “Amendment
      Effective Date”
means
      the date on which the Amendment is effective.

    


    “Business
      Day”
means
      a
      day, other than a Saturday or Sunday, on which banks in New York City are open
      for the general transaction of business.

    


    “Certificate
      of Amendment”
means
      a
      Certificate of Amendment to the Company’s Articles of Organization effecting the
      Amendment.

    


    “Common
      Stock Equivalents”
means
      any securities of the Company or the Subsidiaries which would entitle the holder
      thereof to acquire at any time Common Stock, including without limitation,
      any
      debt, preferred stock, rights, options, warrants or other instrument that is
      at
      any time convertible into or exchangeable for, or otherwise entitles the holder
      thereof to receive, Common Stock.

    


    “Company’s
      Knowledge”
means
      the actual knowledge of the executive officers (as defined in Rule 405 under
      the
      1933 Act) of the Company, after due inquiry.

    


    “Confidential
      Information”
means
      trade secrets, confidential information and know-how (including but not limited
      to ideas, formulae, compositions, processes, procedures and techniques, research
      and development information, computer program code, performance specifications,
      support documentation, drawings, specifications, designs, business and marketing
      plans, and customer and supplier lists and related information).

    


    “Control”
      (including the terms “controlling”, “controlled by” or “under common control
      with”) means the possession, direct or indirect, of the power to direct or cause
      the direction of the management and policies of a Person, whether through the
      ownership of voting securities, by contract or otherwise.

    


    “Conversion
      Shares”
means
      the shares of Common Stock issuable upon conversion of the Notes.

    


    “Effective
      Date”
means
      the date on which the initial Registration Statement is declared effective
      by
      the SEC.

    


    “Effectiveness
      Deadline”
means
      the date on which the initial Registration Statement is required to be declared
      effective by the SEC under the terms of the Registration Rights
      Agreement.

    


    “Intellectual
      Property”
means
      all of the following: (i) patents, patent applications, patent disclosures
      and
      inventions (whether or not patentable and whether or not reduced to practice);
      (ii) trademarks, service marks, trade dress, trade names, corporate names,
      logos, slogans and Internet domain names, together with all goodwill associated
      with each of the foregoing; (iii) copyrights and copyrightable works; (iv)
      registrations, applications and renewals for any of the foregoing; and (v)
      proprietary computer software (including but not limited to data, data bases
      and
      documentation).


    
      
        
        

      

      
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    “Interest
      Shares”
means
      shares of Common Stock issuable in lieu of cash interest on the
      Notes.

    


    “Material
      Adverse Effect”
means
      a
      material adverse effect on (i) the assets, liabilities, results of operations,
      condition (financial or otherwise), business, or prospects of the Company and
      its Subsidiaries taken as a whole, or (ii) the ability of the Company to perform
      its obligations under the Transaction Documents.

    


    “Person”
means
      an individual, corporation, partnership, limited liability company, trust,
      business trust, association, joint stock company, joint venture, sole
      proprietorship, unincorporated organization, governmental authority or any
      other
      form of entity not specifically listed herein.

    


    “Proposal”
has
      the
      meaning set forth in Section 7.10.

    


    “Purchase
      Price”
means
      Six Hundred Thousand Dollars ($600,000).

    


    “Registration
      Statement”
has
      the
      meaning set forth in the Registration Rights Agreement.

    


    “SEC
      Filings”
has
      the
      meaning set forth in Section 4.6.

    


    “Securities”
means
      the Notes, the Warrants, the Conversion Shares, the Interest Shares and the
      Warrant Shares.

    


    “Security
      Agreement”
means
      the Pledge and Security Agreement in the form attached hereto as Exhibit
      D.

    


    “Subsidiary”
of
      any
      Person means another Person, an amount of the voting securities, other voting
      ownership or voting partnership interests of which is sufficient to elect at
      least a majority of its Board of Directors or other governing body (or, if
      there
      are no such voting interests, 50% or more of the equity interests of which)
      is
      owned directly or indirectly by such first Person.

    


    “Transaction
      Documents”
means
      this Agreement, the Notes, the Security Agreement, the Warrants, the
      Registration Rights Agreement and the Voting Agreement.

    


    “Voting
      Agreement”
means
      the Voting Agreement in the form attached hereto as Exhibit
      E.

     

    
      
        
        

      

      
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    “Warrant
      Shares”
means
      the shares of Common Stock issuable upon the exercise of the
      Warrants.

    


    “1933
      Act”
means
      the Securities Act of 1933, as amended, or any successor statute, and the rules
      and regulations promulgated thereunder.

    


    “1934
      Act”
means
      the Securities Exchange Act of 1934, as amended, or any successor statute,
      and
      the rules and regulations promulgated thereunder.

    


    2. Purchase
      and Sale of the Notes and the Warrants.
      Subject
      to the terms and conditions of this Agreement, on the Closing Date, each of
      the
      Investors shall severally, and not jointly, purchase, and the Company shall
      sell
      and issue to the Investors, the Notes and the Warrants in the respective amounts
      set forth opposite the Investors’ names on the signature pages attached hereto
      in exchange for the Purchase Price as specified in Section 3 below.

    


    3. Closing.
      Upon
      confirmation that the other conditions to closing specified herein have been
      satisfied or duly waived by the Investors, the Company shall deliver to
      Lowenstein Sandler PC, in trust, the Notes and the Warrants, registered in
      such
      name or names as the Investors may designate, with instructions that such Notes
      and Warrants are to be held for release to the Investors only upon payment
      in
      full of the Purchase Price to the Company by all the Investors. Upon such
      receipt by Lowenstein Sandler PC of the Notes and the Warrants, each Investor
      shall promptly, but no more than one Business Day thereafter, cause a wire
      transfer in same day funds to be sent to the account of the Company as
      instructed in writing by the Company, in an amount representing such Investor’s
      pro rata portion of the Purchase Price as set forth on the signature pages
      to
      this Agreement. On the date (the “Closing Date”) the Company receives the
      Purchase Price, the Notes and the Warrants shall be released to the Investors
      (the “Closing”). The Closing of the purchase and sale of the Notes and the
      Warrants shall take place at the offices of Lowenstein Sandler PC, 1251 Avenue
      of the Americas, 18th Floor, New York, New York 10020, or at such other location
      and on such other date as the Company and the Investors shall mutually
      agree.

    


    4. Representations
      and Warranties of the Company.
      The
      Company hereby represents and warrants to the Investors that, except as set
      forth in the schedules delivered herewith (collectively, the “Disclosure
      Schedules”):

    


    4.
      1 Organization,
      Good Standing and Qualification.
      Each of
      the Company and its Subsidiaries is a corporation duly organized, validly
      existing and in good standing under the laws of the jurisdiction of its
      incorporation and has all requisite corporate power and authority to carry
      on
      its business as now conducted and to own its properties. Each of the Company
      and
      its Subsidiaries is duly qualified to do business as a foreign corporation
      and
      is in good standing in each jurisdiction in which the conduct of its business
      or
      its ownership or leasing of property makes such qualification or leasing
      necessary unless the failure to so qualify has not had and could not reasonably
      be expected to have a Material Adverse Effect. The Company’s Subsidiaries are
      listed on Schedule
      4.1
      hereto.

     

    
      
        
        

      

      
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    4.2 Authorization.
      The
      Company has full power and authority and, except for the approval of the
      Proposal by its stockholders and the filing of the Certificate of Amendment
      as
      contemplated in Section 7.10, has taken all requisite action on the part of
      the
      Company, its officers, directors and stockholders necessary for (i) the
      authorization, execution and delivery of the Transaction Documents, (ii) the
      authorization of the performance of all obligations of the Company hereunder
      or
      thereunder, and (iii) the authorization, issuance (or reservation for issuance)
      and delivery of the Securities.
      When
      delivered in accordance with the terms hereof, the Transaction Documents will
      constitute the legal, valid and binding obligations of the Company, enforceable
      against the Company in accordance with their terms, subject to bankruptcy,
      insolvency, fraudulent transfer, reorganization, moratorium and similar laws
      of
      general applicability, relating to or affecting creditors’ rights
      generally.

    


    4.3 Capitalization.
      The
      issued and outstanding shares of Common Stock have been duly authorized and
      validly issued, are fully paid and nonassessable, have been issued in compliance
      with all federal and state securities laws, were not issued in violation of
      or
      subject to any preemptive rights or other rights to subscribe for or purchase
      securities, and conform in all material respects to the description thereof
      contained in the Company’s filings with the SEC. Except as set forth in the
      Company’s SEC Filings and except for options and other awards that may be
      granted under the Company’s Amended and Restated 1997 Incentive Plan or the
      Company’s 2006 Equity Incentive Plan, the Company does not have outstanding any
      options to purchase, or any preemptive rights or other rights to subscribe
      for
      or to purchase, any securities or obligations convertible into, or any contracts
      or commitments to issue or sell, shares of its capital stock or any such
      options, rights, convertible securities or obligations. Except as contemplated
      by this Agreement, neither the Company nor any of its Subsidiaries is currently
      in negotiations for the issuance of any equity securities of any kind. Except
      as
      described on Schedule
      4.3
      and
      except for the Registration Rights Agreement and the Voting Agreements, there
      are no voting agreements, buy-sell agreements, option or right of first purchase
      agreements or other agreements of any kind among the Company and any of the
      securityholders of the Company relating to the securities of the Company held
      by
      them. Except as described on Schedule
      4.3
      and
      except as provided in the Registration Rights Agreement, no Person has the
      right
      to require the Company to register any securities of the Company under the
      1933
      Act, whether on a demand basis or in connection with the registration of
      securities of the Company for its own account or for the account of any other
      Person.

    


    Except
      as
      described on Schedule
      4.3,
      the
      issuance and sale of the Securities hereunder will not obligate the Company
      to
      issue shares of Common Stock or other securities to any other Person (other
      than
      the Investors) and will not result in the adjustment of the exercise,
      conversion, exchange or reset price of any outstanding security.

    


    Except
      as
      described on Schedule
      4.3,
      the
      Company does not have outstanding stockholder purchase rights or “poison pill”
or any similar arrangement in effect giving any Person the right to purchase
      any
      equity interest in the Company upon the occurrence of certain
      events.

    


    4.4 Valid
      Issuance.
      From
      and after the Amendment Effective Date, (i) the Conversion Shares will have
      been
      duly and validly authorized and, when issued upon the due conversion of the
      Notes, will be validly issued, fully paid and nonassessable, and shall be free
      and clear of all encumbrances and restrictions (other than those created by
      the
      Investors), except for restrictions on transfer set forth in the Transaction
      Documents or imposed by applicable securities laws, and (ii) the Interest Shares
      will have been duly and validly authorized and, when issued in accordance with
      the terms of the Notes, will be validly issued, fully paid and nonassessable,
      and shall be free and clear of all encumbrances and restrictions (other than
      those created by the Investors), except for restrictions on transfer set forth
      in the Transaction Documents or imposed by applicable securities laws. The
      Warrants have been duly and validly authorized. From and after the Amendment
      Effective Date, the Warrant Shares will have been duly and validly authorized
      and, when issued upon the due exercise of the Warrants, will be validly issued,
      fully paid and non-assessable free and clear of all encumbrances and
      restrictions, except for restrictions on transfer set forth in the Transaction
      Documents or imposed by applicable securities laws and except for those created
      by the Investors. From and after the Amendment Effective Date, the Company
      will
      have reserved a sufficient number of shares of Common Stock for issuance upon
      the conversion of the Notes, the payment of interest on the Notes and upon
      exercise of the Warrants, free and clear of all encumbrances and restrictions,
      except for restrictions on transfer set forth in the Transaction Documents
      or
      imposed by applicable securities laws and except for those created by the
      Investors.



    
      
        
        

      

      
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    4.5 Consents.
      Except
      for the approval of the Proposal by its stockholders and the filing of the
      Certificate of Amendment as contemplated in Section 7.10, the
      execution, delivery and performance by the Company of the Transaction Documents
      and the offer, issuance and sale of the Securities require no consent of, action
      by or in respect of, or filing with, any Person, governmental body, agency,
      or
      official other than filings that have been made pursuant to applicable state
      securities laws and post-sale filings pursuant to applicable state and federal
      securities laws which the Company undertakes to file within the applicable
      time
      periods. Subject to the accuracy of the representations and warranties of each
      Investor set forth in Section 5 hereof, the Company has taken all action
      necessary to exempt (i) the issuance and sale of the Securities, (ii) the
      issuance of the Conversion Shares upon the due conversion of the Notes, the
      issuance of the Interest Shares as provided in the Notes and the issuance of
      the
      Warrant Shares upon due exercise of the Warrants, and (iii) the other
      transactions contemplated by the Transaction Documents from the provisions
      of
      any stockholder rights plan or other “poison pill” arrangement, any
      anti-takeover, business combination or control share law or statute binding
      on
      the Company or to which the Company or any of its assets and properties may
      be
      subject and any provision of the Company’s Articles of Organization or Bylaws
      that is or could reasonably be expected to become applicable to the Investors
      as
      a result of the transactions contemplated hereby, including without limitation,
      the issuance of the Securities and the ownership, disposition or voting of
      the
      Securities by the Investors or the exercise of any right granted to the
      Investors pursuant to this Agreement or the other Transaction
      Documents.

    


    4.6 Delivery
      of SEC Filings; Business.
      The
      Company has made available to the Investors through the EDGAR system, true
      and
      complete copies of the Company’s most recent Annual Report on Form 10-KSB for
      the fiscal year ended June 30, 2007 (the “10-KSB”), and all other reports filed
      by the Company pursuant to the 1934 Act since the filing of the 10-KSB and
      prior
      to the date hereof (collectively, the “SEC Filings”). The SEC Filings are the
      only filings required of the Company pursuant to the 1934 Act for such period.
      The Company and its Subsidiaries are engaged in all material respects only
      in
      the business described in the SEC Filings and the SEC Filings contain a complete
      and accurate description in all material respects of the business of the Company
      and its Subsidiaries, taken as a whole.

     

    
      
        
        

      

      
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    4.7 Use
      of
      Proceeds.
      The net
      proceeds of the sale of the Notes and the Warrants hereunder shall be used
      by
      the Company for working capital and general corporate purposes.

    


    4.8 No
      Material Adverse Change.
      Since
      June 30, 2007, except for the Amendment and except as identified and described
      in the SEC Filings or as described on Schedule
      4.8,
      there
      has not been:

    


    (i) any
      change in the consolidated assets, liabilities, financial condition or operating
      results of the Company from that reflected in the financial statements included
      in the Company’s Quarterly Report on Form 10-QSB for the quarter ended March 31,
      2008, except for changes in the ordinary course of business which have not
      had
      and could not reasonably be expected to have a Material Adverse Effect,
      individually or in the aggregate;

    


    (ii) any
      declaration or payment of any dividend, or any authorization or payment of
      any
      distribution, on any of the capital stock of the Company, or any redemption
      or
      repurchase of any securities of the Company;

    


    (iii) any
      material damage, destruction or loss, whether or not covered by insurance to
      any
      assets or properties of the Company or its Subsidiaries;

    


    (iv) any
      waiver, not in the ordinary course of business, by the Company or any Subsidiary
      of a material right or of a material debt owed to it;

    


    (v) any
      satisfaction or discharge of any lien, claim or encumbrance or payment of any
      obligation by the Company or a Subsidiary, except in the ordinary course of
      business and which is not material to the assets, properties, financial
      condition, operating results or business of the Company and its Subsidiaries
      taken as a whole (as such business is presently conducted and as it is proposed
      to be conducted);

    


    (vi) any
      change or amendment to the Company's Articles of Organization or Bylaws, or
      material change to any material contract or arrangement by which the Company
      or
      any Subsidiary is bound or to which any of their respective assets or properties
      is subject;

    


    (vii) any
      material labor difficulties or labor union organizing activities with respect
      to
      employees of the Company or any Subsidiary;

    


    (viii) any
      material transaction entered into by the Company or a Subsidiary other than
      in
      the ordinary course of business; 



    
      
        
        

      

      
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    (ix) the
      loss
      of the services of any key employee, or material change in the composition
      or
      duties of the senior management of the Company or any Subsidiary;

    


    (x) the
      loss
      or threatened loss of any customer which has had or could reasonably be expected
      to have a Material Adverse Effect; or

    


    (xi) any
      other
      event or condition of any character that has had or could reasonably be expected
      to have a Material Adverse Effect.

    


    4.9 SEC
      Filings.

    


    (a) At
      the
      time of filing thereof, the SEC Filings complied as to form in all material
      respects with the requirements of the 1934 Act and did not contain any untrue
      statement of a material fact or omit to state any material fact necessary in
      order to make the statements made therein, in the light of the circumstances
      under which they were made, not misleading.

    


    (b) Each
      registration statement and any amendment thereto filed by the Company since
      January 1, 2005 pursuant to the 1933 Act and the rules and regulations
      thereunder, as of the date such statement or amendment became effective,
      complied as to form in all material respects with the 1933 Act and did not
      contain any untrue statement of a material fact or omit to state any material
      fact required to be stated therein or necessary in order to make the statements
      made therein not misleading; and each prospectus filed pursuant to Rule 424(b)
      under the 1933 Act, as of its issue date and as of the closing of any sale
      of
      securities pursuant thereto did not contain any untrue statement of a material
      fact or omit to state any material fact required to be stated therein or
      necessary in order to make the statements made therein, in the light of the
      circumstances under which they were made, not misleading.

    


    4.10 No
      Conflict, Breach, Violation or Default.
      Subject
      to the approval of the Proposal by its stockholders and the filing of the
      Certificate of Amendment as contemplated by Section 7.10, the execution,
      delivery and performance of the Transaction Documents by the Company and the
      issuance and sale of the Securities will not conflict with or result in a breach
      or violation of any of the terms and provisions of, or constitute a default
      under (i) the Company’s Articles of Organization or the Company’s Bylaws, both
      as in effect on the date hereof (true and complete copies of which have been
      filed with the SEC), or (ii)(a) any statute, rule, regulation or order of any
      governmental agency or body or any court, domestic or foreign, having
      jurisdiction over the Company, any Subsidiary or any of their respective assets
      or properties, or (b) any agreement or instrument to which the Company or any
      Subsidiary is a party or by which the Company or a Subsidiary is bound or to
      which any of their respective assets or properties is subject, except, in the
      case of clause (ii) only, such breaches, violations or defaults that
      individually or in the aggregate would not cause a Material Adverse
      Effect.

    


    4.11 Tax
      Matters.
      The
      Company and each Subsidiary has timely prepared and filed all tax returns
      required to have been filed by the Company or such Subsidiary with all
      appropriate governmental agencies and timely paid all taxes shown thereon or
      otherwise owed by it (after giving effect to applicable extensions). The
      charges, accruals and reserves on the books of the Company in respect of taxes
      for all fiscal periods are adequate in all material respects, and there are
      no
      material unpaid assessments against the Company or any Subsidiary nor, to the
      Company’s Knowledge, any basis for the assessment of any additional taxes,
      penalties or interest for any fiscal period or audits by any federal, state
      or
      local taxing authority except for any assessment which is not material to the
      Company and its Subsidiaries, taken as a whole. All taxes and other assessments
      and levies that the Company or any Subsidiary is required to withhold or to
      collect for payment have been duly withheld and collected and paid to the proper
      governmental entity or third party when due. There are no tax liens or claims
      pending or, to the Company’s Knowledge, threatened against the Company or any
      Subsidiary or any of their respective assets or property. Except as described
      on
Schedule
      4.11,
      there
      are no outstanding tax sharing agreements or other such arrangements between
      the
      Company and any Subsidiary or other corporation or entity.



    
      
        
        

      

      
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    4.12 Title
      to Properties.
      Except
      as disclosed in the SEC Filings, the Company and each Subsidiary has good and
      marketable title to all real properties and all other properties and assets
      owned by it, in each case free from liens, encumbrances and defects that would
      materially affect the value thereof or materially interfere with the use made
      or
      currently planned to be made thereof by them; and except as disclosed in the
      SEC
      Filings, the Company and each Subsidiary holds any leased real or personal
      property under valid and enforceable leases with no exceptions that would
      materially interfere with the use made or currently planned to be made thereof
      by them.

    


    4.13 Certificates,
      Authorizations and Permits.
      The
      Company and each Subsidiary possess adequate certificates, authorizations or
      permits issued by appropriate governmental agencies or bodies necessary to
      conduct the business now operated by it, except where the failure to possess
      such certificates, authorizations or permits has not had and could not
      reasonably be expected to have a Material Adverse Effect, and neither the
      Company nor any Subsidiary has received any notice of proceedings relating
      to
      the revocation or modification of any such certificate, authority or permit
      that, if determined adversely to the Company or such Subsidiary, could
      reasonably be expected to have a Material Adverse Effect, individually or in
      the
      aggregate.

    


    4.14 Labor
      Matters.

     

    (a) Except
      as
      set forth on Schedule
      4.14,
      the
      Company is not a party to or bound by any collective bargaining agreements
      or
      other agreements with labor organizations. Except as set forth on Schedule
      4.14,
      the
      Company has not violated in any material respect any laws, regulations, orders
      or contract terms, affecting the collective bargaining rights of employees,
      labor organizations or any laws, regulations or orders affecting employment
      discrimination, equal opportunity employment, or employees’ health, safety,
      welfare, wages and hours.

     

    (b) (i)
      There
      are no labor disputes existing, or to the Company's Knowledge, threatened,
      involving strikes, slow-downs, work stoppages, job actions, disputes, lockouts
      or any other disruptions of or by the Company's employees, (ii) there are no
      unfair labor practices or petitions for election pending or, to the Company's
      Knowledge, threatened before the National Labor Relations Board or any other
      federal, state or local labor commission relating to the Company's employees,
      (iii) no demand for recognition or certification heretofore made by any labor
      organization or group of employees is pending with respect to the Company and
      (iv) to the Company's Knowledge, the Company enjoys good labor and employee
      relations with its employees and labor organizations.


    
      
        
        

      

      
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    (c) Except
      as
      disclosed in the SEC Filings or as described on Schedule
      4.14,
      the
      Company is, and at all times has been, in compliance in all material respects
      with all applicable laws respecting employment (including laws relating to
      classification of employees and independent contractors) and employment
      practices, terms and conditions of employment, wages and hours, and immigration
      and naturalization. There are no claims pending against the Company before
      the
      Equal Employment Opportunity Commission or any other administrative body or
      in
      any court asserting any violation of Title VII of the Civil Rights Act of 1964,
      the Age Discrimination Act of 1967, 42 U.S.C. §§ 1981 or 1983 or any other
      federal, state or local Law, statute or ordinance barring discrimination in
      employment.

     

    (d) Except
      as
      disclosed in the SEC Filings or as described on Schedule
      4.14,
      the
      Company is not a party to, or bound by, any employment or other contract or
      agreement that contains any severance, termination pay or change of control
      liability or obligation, including, without limitation, any “excess parachute
      payment,” as defined in Section 280G(b) of the Internal Revenue
      Code.

    


    (e) Except
      as
      specified in Schedule
      4.14,
      each of
      the Company's employees is a Person who is either a United States citizen or
      a
      permanent resident entitled to work in the United States. To the Company's
      Knowledge, the Company has no liability for the improper classification by
      the
      Company of such employees as independent contractors or leased employees prior
      to the Closing.

    


    4.15 Intellectual
      Property.

    


    (a) All
      Intellectual Property of the Company and its Subsidiaries is currently in
      compliance with all legal requirements (including timely filings, proofs and
      payments of fees) and is valid and enforceable. No Intellectual Property of
      the
      Company or its Subsidiaries which is necessary for the conduct of Company’s and
      each of its Subsidiaries’ respective businesses as currently conducted or as
      currently proposed to be conducted has been or is now involved in any
      cancellation, dispute or litigation, and, to the Company’s Knowledge, no such
      action is threatened. No patent of the Company or its Subsidiaries has been
      or
      is now involved in any interference, reissue, re-examination or opposition
      proceeding.

    


    (b) All
      of
      the licenses and sublicenses and consent, royalty or other agreements concerning
      Intellectual Property which are necessary for the conduct of the Company’s and
      each of its Subsidiaries’ respective businesses as currently conducted or as
      currently proposed to be conducted to which the Company or any Subsidiary is
      a
      party or by which any of their assets are bound (other than  generally
      commercially available, non-custom, off-the-shelf software application programs
      having a retail acquisition price of less than $10,000 per license)
      (collectively, “License Agreements”) are valid and binding obligations of the
      Company or its Subsidiaries that are parties thereto and, to the Company’s
      Knowledge, the other parties thereto, enforceable in accordance with their
      terms, except to the extent that enforcement thereof may be limited by
      bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
      other similar laws affecting the enforcement of creditors’ rights generally, and
      there exists no event or condition which will result in a material violation
      or
      breach of or constitute (with or without due notice or lapse of time or both)
      a
      default by the Company or any of its Subsidiaries under any such License
      Agreement.



    
      
        
        

      

      
        -10-

        
          

        

      

      
        
        

      

    


    (c) The
      Company and its Subsidiaries own or have the valid right to use all of the
      Intellectual Property that is necessary for the conduct of the Company’s and
      each of its Subsidiaries’ respective businesses as currently conducted or as
      currently proposed to be conducted and for the ownership, maintenance and
      operation of the Company’s and its Subsidiaries’ properties and assets, free and
      clear of all liens, encumbrances, adverse claims or obligations to license
      all
      such owned Intellectual Property and Confidential Information, other than
      licenses entered into in the ordinary course of the Company’s and its
      Subsidiaries’ businesses. The Company and its Subsidiaries have a valid and
      enforceable right to use all third party Intellectual Property and Confidential
      Information used or held for use in the respective businesses of the Company
      and
      its Subsidiaries.

    


    (d) To
      the
      Company’s Knowledge, the conduct of the Company’s and its Subsidiaries’
businesses as currently conducted does not infringe or otherwise impair or
      conflict with (collectively, “Infringe”) any Intellectual Property rights of any
      third party or any confidentiality obligation owed to a third party, and, to
      the
      Company’s Knowledge, the Intellectual Property and Confidential Information of
      the Company and its Subsidiaries which are necessary for the conduct of
      Company’s and each of its Subsidiaries’ respective businesses as currently
      conducted or as currently proposed to be conducted are not being Infringed
      by
      any third party. There is no litigation or order pending or outstanding or,
      to
      the Company’s Knowledge, threatened or imminent, that seeks to limit or
      challenge or that concerns the ownership, use, validity or enforceability of
      any
      Intellectual Property or Confidential Information of the Company and its
      Subsidiaries and the Company’s and its Subsidiaries’ use of any Intellectual
      Property or Confidential Information owned by a third party, and, to the
      Company’s Knowledge, there is no valid basis for the same.

    


    (e) The
      consummation of the transactions contemplated hereby and by the other
      Transaction Documents will not result in the alteration, loss, impairment of
      or
      restriction on the Company’s or any of its Subsidiaries’ ownership or right to
      use any of the Intellectual Property or Confidential Information which is
      necessary for the conduct of Company’s and each of its Subsidiaries’ respective
      businesses as currently conducted or as currently proposed to be
      conducted.

    


    (f) The
      Company and its Subsidiaries have taken reasonable steps to protect the
      Company’s and its Subsidiaries’ rights in their Intellectual Property and
      Confidential Information. Except under confidentiality obligations, there has
      been no material disclosure of any of the Company’s or its Subsidiaries’
Confidential Information to any third party.



    
      
        
        

      

      
        -11-

        
          

        

      

      
        
        

      

    


    4.16 Environmental
      Matters.
      Neither
      the Company nor any Subsidiary is in violation of any statute, rule, regulation,
      decision or order of any governmental agency or body or any court, domestic
      or
      foreign, relating to the use, disposal or release of hazardous or toxic
      substances or relating to the protection or restoration of the environment
      or
      human exposure to hazardous or toxic substances (collectively, “Environmental
      Laws”), owns or operates any real property contaminated with any substance that
      is subject to any Environmental Laws, is liable for any off-site disposal or
      contamination pursuant to any Environmental Laws, or is subject to any claim
      relating to any Environmental Laws, which violation, contamination, liability
      or
      claim has had or could reasonably be expected to have a Material Adverse Effect,
      individually or in the aggregate; and there is no pending or, to the Company’s
      Knowledge, threatened investigation that might lead to such a
      claim.

    


    4.17 Litigation.
      Except
      as described on Schedule
      4.17,
      there
      are no pending legal actions, suits or proceedings against or affecting the
      Company, its Subsidiaries or any of its or their properties; and to the
      Company’s Knowledge, no such actions, suits or proceedings are threatened or
      contemplated. Neither the Company nor any Subsidiary, nor any director or
      officer thereof, is or since January 1, 2003 has been the subject of any action
      involving a claim of violation of or liability under federal or state securities
      laws or a claim of breach of fiduciary duty. There has not been, and to the
      Company’s Knowledge, there is not pending or contemplated, any investigation by
      the SEC involving the Company or any current or former director or officer
      of
      the Company. The SEC has not issued any stop order or other order suspending
      the
      effectiveness of any registration statement filed by the Company or any
      Subsidiary under the 1933 Act or the 1934 Act.

    


    4.18 Financial
      Statements.
      The
      financial statements included in each SEC Filing present fairly, in all material
      respects, the consolidated financial position of the Company as of the dates
      shown and its consolidated results of operations and cash flows for the periods
      shown, and such financial statements have been prepared in conformity with
      United States generally accepted accounting principles applied on a consistent
      basis (“GAAP”) (except as may be disclosed therein or in the notes thereto, and,
      in the case of quarterly financial statements, as permitted by Form 10QSB under
      the 1934 Act); provided, however, that the unaudited financial statements are
      subject to normal year-end audit adjustments (which are not expected to be
      material) and do not contain all footnotes required under generally accepted
      accounting principles. As of their respective dates, such financial statements
      complied as to form in all material respects with the published rules and
      regulations of the Commission with respect thereto. Except as set forth in
      the
      financial statements of the Company included in the SEC Filings filed prior
      to
      the date hereof or as described on Schedule
      4.18,
      neither
      the Company nor any of its Subsidiaries has incurred any liabilities, contingent
      or otherwise, except those incurred in the ordinary course of business,
      consistent (as to amount and nature) with past practices since the date of
      such
      financial statements, none of which, individually or in the aggregate, have
      had
      or could reasonably be expected to have a Material Adverse Effect.

    


    4.19 Insurance
      Coverage.
      The
      Company and each Subsidiary maintains in full force and effect insurance
      coverage that is customary for comparably situated companies for the business
      being conducted and properties owned or leased by the Company and each
      Subsidiary, and the Company reasonably believes such insurance coverage to
      be
      adequate against all liabilities, claims and risks against which it is customary
      for comparably situated companies to insure.



    
      
        
        

      

      
        -12-

        
          

        

      

      
        
        

      

    


    4.20 OTCBB
      Compliance.
      The
      Common Stock is registered pursuant to Section 12(g) of the 1934 Act and is
      quoted on The Nasdaq Stock Market, Inc.’s OTC Bulletin Board quotation service
      (the “OTCBB”), and the Company has taken no action designed to, or likely to
      have the effect of, terminating the registration of the Common Stock under
      the
      1934 Act or removal from quotation of the Common Stock from the OTCBB, nor
      has
      the Company received any notification that the SEC, the OTCBB or the Financial
      Industry Regulatory Authority, Inc. is contemplating terminating such
      registration or quotation.

    


    4.21 Brokers
      and Finders.
      No
      Person will have, as a result of the transactions contemplated by the
      Transaction Documents, any valid right, interest or claim against or upon the
      Company, any Subsidiary or an Investor for any commission, fee or other
      compensation pursuant to any agreement, arrangement or understanding entered
      into by or on behalf of the Company, other than as described in Schedule
      4.21.

    


    4.22 No
      Directed Selling Efforts or General Solicitation.
      Neither
      the Company nor any Person acting on its behalf has conducted any general
      solicitation or general advertising (as those terms are used in Regulation
      D) in
      connection with the offer or sale of any of the Securities.

    


    4.23 No
      Integrated Offering.
      Neither
      the Company nor any of its Affiliates, nor any Person acting on its or their
      behalf has, directly or indirectly, made any offers or sales of any Company
      security or solicited any offers to buy any security, under circumstances that
      would adversely affect reliance by the Company on Section 4(2) for the exemption
      from registration for the transactions contemplated hereby or would require
      registration of the Securities under the 1933 Act.

    


    4.24 Private
      Placement.
      The
      offer and sale of the Securities to the Investors as contemplated hereby is
      exempt from the registration requirements of the 1933 Act.

    


    4.25 Questionable
      Payments.
      Neither
      the Company nor any of its Subsidiaries nor, to the Company’s Knowledge, any of
      their respective current or former directors, officers, employees, agents or
      other Persons acting on behalf of the Company or any Subsidiary, has on behalf
      of the Company or any Subsidiary or in connection with their respective
      businesses: (a) used any corporate funds for unlawful contributions, gifts,
      entertainment or other unlawful expenses relating to political activity; (b)
      made any direct or indirect unlawful payments to any governmental officials
      or
      employees from corporate funds; (c) established or maintained any unlawful
      or
      unrecorded fund of corporate monies or other assets; (d) made any false or
      fictitious entries on the books and records of the Company or any Subsidiary;
      or
      (e) made any unlawful bribe, rebate, payoff, influence payment, kickback or
      other unlawful payment of any nature.

    


    4.26 Transactions
      with Affiliates.
      Except
      as disclosed in the SEC Filings or as disclosed on Schedule
      4.26,
      none of
      the officers or directors of the Company and, to the Company’s Knowledge, none
      of the employees of the Company is presently a party to any transaction with
      the
      Company or any Subsidiary (other than as holders of stock options and/or
      warrants, and for services as employees, officers and directors), including
      any
      contract, agreement or other arrangement providing for the furnishing of
      services to or by, providing for rental of real or personal property to or
      from,
      or otherwise requiring payments to or from any officer, director or such
      employee or, to the Company’s Knowledge, any entity in which any officer,
      director, or any such employee has a substantial interest or is an officer,
      director, trustee or partner.



    
      
        
        

      

      
        -13-

        
          

        

      

      
        
        

      

    


    4.27 Internal
      Controls.
      The
      Company is
      in
      material compliance with the provisions of the Sarbanes-Oxley Act of 2002
      currently applicable to the Company. The Company and
      the
      Subsidiaries maintain a system of internal accounting controls sufficient to
      provide reasonable assurance that (i) transactions are executed in accordance
      with management's general or specific authorizations, (ii) transactions are
      recorded as necessary to permit preparation of financial statements in
      conformity with GAAP and to maintain asset accountability, (iii) access to
      assets is permitted only in accordance with management's general or specific
      authorization, and (iv) the recorded accountability for assets is compared
      with
      the existing assets at reasonable intervals and appropriate action is taken
      with
      respect to any differences. The Company has established disclosure controls
      and
      procedures (as defined in 1934 Act Rules 13a-15(e) and 15d-15(e)) for the
      Company and designed such disclosure controls and procedures to ensure that
      material information relating to the Company, including the Subsidiaries, is
      made known to the certifying officers by others within those entities,
      particularly during the period in which the Company’s most recently filed
      periodic report under the 1934 Act, as the case may be, is being prepared.
      The
      Company's certifying officers have evaluated the effectiveness of the Company's
      controls and procedures as of the end of the period covered by the most recently
      filed periodic report under the 1934 Act (such date, the "Evaluation Date").
      The
      Company presented in its most recently filed periodic report under the 1934
      Act
      the conclusions of the certifying officers about the effectiveness of the
      disclosure controls and procedures based on their evaluations as of the
      Evaluation Date. Since the Evaluation Date, there have been no significant
      changes in the Company's internal controls (as such term is defined in Item
      308
      of Regulation S-K) or, to the Company's Knowledge, in other factors that could
      significantly affect the Company's internal controls. The Company maintains
      and
      will continue to maintain a standard system of accounting established and
      administered in accordance with GAAP and the applicable requirements of the
      1934
      Act.

    


    4.28 Disclosures.
      Neither
      the Company nor any Person acting on its behalf has provided the Investors
      or
      their agents or counsel with any information that constitutes, as of the Closing
      Date, material non-public information, other than the terms of the transactions
      contemplated hereby. The written materials delivered to the Investors in
      connection with the transactions contemplated by the Transaction Documents
      do
      not contain any untrue statement of a material fact or omit to state a material
      fact necessary in order to make the statements contained therein, in light
      of
      the circumstances under which they were made, not misleading.

    


    5. Representations
      and Warranties of the Investors.
      Each of
      the Investors hereby severally, and not jointly, represents and warrants to
      the
      Company that:



    
      
        
        

      

      
        -14-

        
          

        

      

      
        
        

      

    


    5.1 Organization
      and Existence.
      If the
      Investor is not an individual, such Investor is a validly existing corporation,
      limited partnership or limited liability company and has all requisite
      corporate, partnership or limited liability company power and authority to
      invest in the Securities pursuant to this Agreement.

    


    5.2 Authorization.
      The
      execution, delivery and performance by such Investor of the Transaction
      Documents to which such Investor is a party have been duly authorized and will
      each constitute the valid and legally binding obligation of such Investor,
      enforceable against such Investor in accordance with their respective terms,
      subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
      moratorium and similar laws of general applicability, relating to or affecting
      creditors’ rights generally.

    


    5.3 Purchase
      Entirely for Own Account.
      The
      Securities to be received by such Investor hereunder will be acquired for such
      Investor’s own account, not as nominee or agent, and not with a view to the
      resale or distribution of any part thereof in violation of the 1933 Act, and
      such Investor has no present intention of selling, granting any participation
      in, or otherwise distributing the same in violation of the 1933 Act
      without
      prejudice, however, to such Investor’s right at all times to sell or otherwise
      dispose of all or any part of such Securities in compliance with applicable
      federal and state securities laws.
      Nothing
      contained herein shall be deemed a representation or warranty by such Investor
      to hold the Securities for any period of time. Such
      Investor
      is not a broker-dealer registered with the SEC under the 1934 Act or an entity
      engaged in a business that would require it to be so registered.

    


    5.4 Investment
      Experience.
      Such
      Investor acknowledges that it can bear the economic risk and complete loss
      of
      its investment in the Securities and has such knowledge and experience in
      financial or business matters that it is capable of evaluating the merits and
      risks of the investment contemplated hereby.

    


    5.5 Disclosure
      of Information.
      Such
      Investor has had an opportunity to receive all information related to the
      Company requested by it and to ask questions of and receive answers from the
      Company regarding the Company, its business and the terms and conditions of
      the
      offering of the Securities. Such Investor acknowledges receipt of copies of
      the
      SEC Filings. Neither such inquiries nor any other due diligence investigation
      conducted by such Investor shall modify, limit or otherwise affect such
      Investor’s right to rely on the Company’s representations and warranties
      contained in this Agreement.

    


    5.6 Restricted
      Securities.
      Such
      Investor understands that the Securities are characterized as “restricted
      securities” under the U.S. federal securities laws inasmuch as they are being
      acquired from the Company in a transaction not involving a public offering
      and
      that under such laws and applicable regulations such securities may be resold
      without registration under the 1933 Act only in certain limited
      circumstances.

    


    5.7 Legends.
      It is
      understood that, except as provided below, certificates evidencing the
      Securities may bear the following or any similar legend:



    
      
        
        

      

      
        -15-

        
          

        

      

      
        
        

      

    


    (a) “The
      securities represented hereby have not been registered under the Securities
      Act
      of 1933, as amended (the ‘Act’) and may not be transferred unless (i) such
      securities have been registered for sale pursuant to the Act, (ii) such
      securities may be sold without volume restriction pursuant to Rule 144, or
      (iii)
      the Company has received an opinion of counsel reasonably satisfactory to it
      that such transfer may lawfully be made without registration under the
      Securities Act of 1933 or qualification under applicable state securities
      laws.”

    


    (b) If
      required by the authorities of any state in connection with the issuance of
      sale
      of the Securities, the legend required by such state authority.

    


    5.8 Accredited
      Investor.
      Such
      Investor is an accredited investor as defined in Rule 501(a) of Regulation
      D, as
      amended, under the 1933 Act.

    


    5.9 No
      General Solicitation.
      Such
      Investor did not learn of the investment in the Securities as a result of any
      general solicitation or general advertising.

    


    5.10 Brokers
      and Finders.
      No
      Person will have, as a result of the transactions contemplated by the
      Transaction Documents, any valid right, interest or claim against or upon the
      Company, any Subsidiary or an Investor for any commission, fee or other
      compensation pursuant to any agreement, arrangement or understanding entered
      into by or on behalf of such Investor.

    


    5.11 Prohibited
      Transactions.
      Since
      the earlier of (a) such time as such Investor was first contacted by the Company
      or any other Person acting on behalf of the Company regarding the transactions
      contemplated hereby or (b) thirty (30) days prior to the date hereof, neither
      such Investor nor any Affiliate of such Investor which (x) had knowledge of
      the
      transactions contemplated hereby, (y) has or shares discretion relating to
      such
      Investor’s investments or trading or information concerning such Investor’s
      investments, including in respect of the Securities, or (z) is subject to such
      Investor’s review or input concerning such Affiliate’s investments or trading
      (collectively, “Trading Affiliates”) has, directly or indirectly, effected or
      agreed to effect any short sale, whether or not against the box, established
      any
“put equivalent position” (as defined in Rule 16a-1(h) under the 1934 Act) with
      respect to the Common Stock, granted any other right (including, without
      limitation, any put or call option) with respect to the Common Stock or with
      respect to any security that includes, relates to or derived any significant
      part of its value from the Common Stock or otherwise sought to hedge its
      position in the Securities (each, a “Prohibited Transaction”). Prior to the
      earliest to occur of (i) the termination of this Agreement, (ii) the Effective
      Date or (iii) the Effectiveness Deadline, such Investor shall not, and shall
      cause its Trading Affiliates not to, engage, directly or indirectly, in a
      Prohibited Transaction. Such Investor acknowledges that the representations,
      warranties and covenants contained in this Section 5.11 are being made for
      the
      benefit of the Investors as well as the Company and that each of the other
      Investors shall have an independent right to assert any claims against such
      Investor arising out of any breach or violation of the provisions of this
      Section 5.11.

    


    5.12 Reliance
      on Exemptions.
      Such
      Investor understands that the Securities are being offered and sold to it in
      reliance upon specific exemptions from the registration requirements of the
      1933
      Act, the rules and regulations promulgated thereunder and state securities
      laws
      and that the Company is relying upon the truth and accuracy of, and the
      Investor’s compliance with, the representations, warranties, agreements,
      acknowledgments and understandings of the Investor set forth herein in order
      to
      determine the availability of such exemptions and the eligibility of the
      Investor to acquire the Securities.



    
      
        
        

      

      
        -16-

        
          

        

      

      
        
        

      

    


    5.13 Investment
      Decision.
      Such
      Investor understands that nothing in the Agreement or any other materials
      presented to such Investor in connection with the purchase and sale of the
      Securities constitutes legal, tax or investment advice. Such Investor has
      consulted such legal, tax and investment advisors as it, in its sole discretion,
      has deemed necessary or appropriate in connection with its purchase of the
      Securities. 

    


    5.14 Risk
      of Loss.
      Such
      Investor understands that its investment in the Securities involves a
      significant degree of risk, including a risk of total loss of such Investor’s
      investment, and such Investor has full cognizance of and understands all of
      the
      risk factors related to such Investor’s purchase of the Securities, including,
      but not limited to, those set forth under or incorporated by reference under
      the
      caption “Factors That May Affect Future Results and Market Price of Stock” in
      the SEC Filings. Such Investor understands that the market price of the Common
      Stock has been volatile and that no representation is being made as to the
      future value of the Common Stock.

    


    5.15 No
      Government Review.
      Such
      Investor understands that no United States federal or state agency or any other
      government or governmental agency has passed upon or made any recommendation
      or
      endorsement of the Securities.

    


    5.16 Residency.
      Such
      Investor's principal executive office, if an entity, or residence, if an
      individual, is in the jurisdiction set forth immediately below such Investor’s
      name on the signature pages hereto.

    


    6.
      Conditions
      to Closing.

    


    6.1 Conditions
      to the Investors’ Obligations.
      The
      obligation of each Investor to purchase the Notes and the Warrants at the
      Closing is subject to the fulfillment to such Investor’s satisfaction, on or
      prior to the Closing Date, of the following conditions, any of which may be
      waived by such Investor (as to itself only):

    


    (a) The
      representations and warranties made by the Company in Section 4 hereof qualified
      as to materiality shall be true and correct at all times prior to and on the
      Closing Date, except to the extent any such representation or warranty expressly
      speaks as of an earlier date, in which case such representation or warranty
      shall be true and correct as of such earlier date, and, the representations
      and
      warranties made by the Company in Section 4 hereof not qualified as to
      materiality shall be true and correct in all material respects at all times
      prior to and on the Closing Date, except to the extent any such representation
      or warranty expressly speaks as of an earlier date, in which case such
      representation or warranty shall be true and correct in all material respects
      as
      of such earlier date. The Company shall have performed in all material respects
      all obligations and covenants herein required to be performed by it on or prior
      to the Closing Date.



    
      
        
        

      

      
        -17-

        
          

        

      

      
        
        

      

    


    (b) The
      Company shall have obtained any and all consents, permits, approvals,
      registrations and waivers necessary or appropriate for consummation of the
      purchase and sale of the Securities and the consummation of the other
      transactions contemplated by the Transaction Documents, all of which shall
      be in
      full force and effect.

    


    (c) The
      Company shall have executed and delivered the Registration Rights Agreement,
      the
      Voting Agreements, the Security Agreement and the other Security
      Documents.

    


    (d) No
      judgment, writ, order, injunction, award or decree of or by any court, or judge,
      justice or magistrate, including any bankruptcy court or judge, or any order
      of
      or by any governmental authority, shall have been issued, and no action or
      proceeding shall have been instituted by any governmental authority, enjoining
      or preventing the consummation of the transactions contemplated hereby or in
      the
      other Transaction Documents.

    


    (e) The
      Company shall have delivered to the Investors a Certificate, executed on behalf
      of the Company by its Chief Executive Officer or its Chief Financial Officer,
      dated as of the Closing Date, certifying to the fulfillment of the conditions
      specified in subsections (a), (b), (d) and (h) of this Section 6.1.

    


    (f) The
      Company shall have delivered to the Investors a Certificate, executed on behalf
      of the Company by its Clerk, dated as of the Closing Date, certifying the
      resolutions adopted by the Board of Directors of the Company approving (i)
      the
      transactions contemplated by this Agreement and the other Transaction Documents,
      (ii) the issuance of the Securities and (iii) the Amendment, certifying the
      current versions of the Articles of Organization and Bylaws of the Company
      and
      certifying as to the signatures and authority of persons signing the Transaction
      Documents and related documents on behalf of the Company.

    


    (g) The
      Investors shall have received an opinion from Ropes & Gray LLP, the
      Company's counsel, dated as of the Closing Date, in form and substance
      reasonably acceptable to the Investors and addressing such legal matters as
      the
      Investors may reasonably request.

    


    (h) No
      stop
      order or suspension of trading shall have been imposed by the SEC or any other
      governmental or regulatory body with respect to public trading in the Common
      Stock.

    


    (i) The
      Persons set forth in Schedule 6.1 shall have executed and delivered Voting
      Agreements.

    


    6.2 Conditions
      to Obligations of the Company.
      The
      Company's obligation to sell and issue the Notes and the Warrants at the Closing
      is subject to the fulfillment to the satisfaction of the Company on or prior
      to
      the Closing Date of the following conditions, any of which may be waived by
      the
      Company:



    
      
        
        

      

      
        -18-

        
          

        

      

      
        
        

      

    


    (a) The
      representations and warranties made by the Investors in Section 5 hereof, other
      than the representations and warranties contained in Sections 5.3, 5.4, 5.5,
      5.6, 5.7, 5.8 and 5.9 (the “Investment Representations”), shall be true and
      correct in all material respects when made, and shall be true and correct in
      all
      material respects on the Closing Date with the same force and effect as if
      they
      had been made on and as of said date. The Investment Representations shall
      be
      true and correct in all respects when made, and shall be true and correct in
      all
      respects on the Closing Date with the same force and effect as if they had
      been
      made on and as of said date. The Investors shall have performed in all material
      respects all obligations and covenants herein required to be performed by them
      on or prior to the Closing Date.

    


    (b) The
      Investors shall have executed and delivered the Registration Rights Agreement,
      the Security Agreement and the other Security Documents to which they are a
      party.

    


    (c) The
      Investors shall have delivered the Purchase Price to the Company.

    


    6.3 Termination
      of Obligations to Effect Closing; Effects.

    


    (a) The
      obligations of the Company, on the one hand, and the Investors, on the other
      hand, to effect the Closing shall terminate as follows:

    


    (i) Upon
      the
      mutual written consent of the Company and the Investors;

    


    (ii) By
      the
      Company if any of the conditions set forth in Section 6.2 shall have become
      incapable of fulfillment, and shall not have been waived by the
      Company;

    


    (iii) By
      an
      Investor (with respect to itself only) if any of the conditions set forth in
      Section 6.1 shall have become incapable of fulfillment, and shall not have
      been
      waived by the Investor; or

    


    (iv) By
      either
      the Company or any Investor (with respect to itself only) if the Closing has
      not
      occurred on or prior to June 30, 2008;

    


    provided,
      however, that, except in the case of clause (i) above, the party seeking to
      terminate its obligation to effect the Closing shall not then be in breach
      of
      any of its representations, warranties, covenants or agreements contained in
      this Agreement or the other Transaction Documents if such breach has resulted
      in
      the circumstances giving rise to such party’s seeking to terminate its
      obligation to effect the Closing.



    
      
        
        

      

      
        -19-

        
          

        

      

      
        
        

      

    


    (b) In
      the
      event of termination by the Company or any Investor of its obligations to effect
      the Closing pursuant to this Section 6.3, written notice thereof shall forthwith
      be given to the other Investors by the Company and the other Investors shall
      have the right to terminate their obligations to effect the Closing upon written
      notice to the Company and the other Investors. Nothing in this Section 6.3
      shall
      be deemed to release any party from any liability for any breach by such party
      of the terms and provisions of this Agreement or the other Transaction Documents
      or to impair the right of any party to compel specific performance by any other
      party of its obligations under this Agreement or the other Transaction
      Documents.

    


    7. Covenants
      and Agreements of the Company.

    


    7.1 Reservation
      of Common Stock.
      From
      and after the Amendment Effective Date, the Company shall at all times reserve
      and keep available out of its authorized but unissued shares of Common Stock,
      solely for the purpose of providing for the conversion of the Notes, the
      issuance of the Interest Shares and the exercise of the Warrants, such number
      of
      shares of Common Stock as shall from time to time equal the Conversion Shares,
      the Interest Shares (assuming all interest on the Notes is paid in Interest
      Shares) and the Warrant Shares.

    


    7.2 Reports.
      The
      Company will furnish to the Investors such information relating to the Company
      and its Subsidiaries as from time to time may reasonably be requested by the
      Investors; provided, however, that the Company shall not disclose material
      nonpublic information to the Investors, or to advisors to or representatives
      of
      the Investors, unless prior to disclosure of such information the Company
      identifies such information as being material nonpublic information and provides
      the Investors, such advisors and representatives with the opportunity to accept
      or refuse to accept such material nonpublic information for review and any
      Investor wishing to obtain such information enters into an appropriate
      confidentiality agreement with the Company with respect thereto.

    


    7.3 No
      Conflicting Agreements.
      The
      Company will not take any action, enter into any agreement or make any
      commitment that would conflict or interfere in any material respect with the
      Company’s obligations to the Investors under the Transaction
      Documents.

    


    7.4 Insurance.
      The
      Company shall not materially reduce the insurance coverages described in Section
      4.19.

    


    7.5 Compliance
      with Laws.
      The
      Company will comply in all material respects with all applicable laws, rules,
      regulations, orders and decrees of all governmental authorities.

    


    7.6 Listing
      of Underlying Shares and Related Matters.
      If the
      Company applies to have its Common Stock or other securities traded on any
      stock
      exchange or market, it shall include in such application the Conversion Shares,
      the Interest Shares and the Warrant Shares and will take such other action
      as is
      necessary to cause such Common Stock to be so listed. Following any such
      listing, the Company will use commercially reasonable efforts to continue the
      listing and trading of its Common Stock on such stock exchange or market and,
      in
      accordance, therewith, will use commercially reasonable efforts to comply in
      all
      respects with the Company’s reporting, filing and other obligations under the
      bylaws or rules of such stock exchange or market, as
      applicable.



    
      
        
        

      

      
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    7.7 Termination
      of Covenants.
      The
      provisions of Sections 7.2 through 7.5 shall terminate and be of no further
      force and effect on the date on which the Company’s obligations under the
      Registration Rights Agreement to register or maintain the effectiveness of
      any
      registration covering the Registrable Securities (as such term is defined in
      the
      Registration Rights Agreement) shall terminate.

    


    7.8 Removal
      of Legends.
      In
      connection with any sale or disposition of the Securities by an Investor
      pursuant to Rule 144 or pursuant to any other exemption under the 1933 Act
      such
      that the purchaser acquires freely tradable shares and upon compliance by the
      Investor with the requirements of this Agreement, the Company shall or, in
      the
      case of Common Stock, shall cause the transfer agent for the Common Stock (the
      “Transfer Agent”) to issue replacement certificates representing the Securities
      sold or disposed of without restrictive legends. Upon the earlier of (i)
      registration for resale pursuant to the Registration Rights Agreement or (ii)
      the Conversion Shares, the Interest Shares or the Warrant Shares, as applicable,
      becoming freely tradable by a non-affiliate pursuant to Rule 144 the Company
      shall (A) deliver to the Transfer Agent irrevocable instructions that the
      Transfer Agent shall issue a certificate representing shares of Common Stock
      without legends upon receipt by such Transfer Agent of (X) either (1) a
      customary representation by the Investor that Rule 144 applies to the shares
      of
      Common Stock represented thereby or (2) a statement by the Investor that such
      Investor has sold the shares of Common Stock represented thereby in accordance
      with the Plan of Distribution contained in the Registration Statement, and
      (Y)
      if applicable, the legended certificates for such shares, and (B) cause its
      counsel to deliver to the Transfer Agent one or more blanket opinions to the
      effect that the removal of such legends in such circumstances may be effected
      under the 1933 Act. At any time when one or more of the Securities may be freely
      sold or is covered by an effective Registration Statement, the Company shall,
      or
      shall cause the Transfer Agent to, promptly cause the Investor’s Securities to
      be replaced with Securities which do not bear restrictive legends, and
      Conversion Shares subsequently issued upon the due conversion of the Notes,
      Interest Shares issued pursuant to the Notes and Warrant Shares subsequently
      issued upon due exercise of the Warrants shall not bear such restrictive legends
      provided such Securities may be freely sold or are covered by an effective
      Registration Statement. When the Company is required to cause an unlegended
      Security to be issued as provided herein, if: (1) the unlegended Security is
      not
      delivered to an Investor within three (3) Business Days of submission by that
      Investor of a request for unlegended Securities and, if applicable, the
      documentation specified above to the Transfer Agent or the Company, as
      applicable, and (2) prior to the time such unlegended Security is received
      by
      the Investor, the Investor, or any third party on behalf of such Investor or
      for
      the Investor’s account, purchases (in an open market transaction or otherwise)
      another Security to deliver in satisfaction of a sale by the Investor of such
      Security (a “Buy-In”), then the Company shall pay in cash to the Investor (for
      costs incurred either directly by such Purchaser or on behalf of a third party)
      the amount by which the total purchase price paid for the replacement Security
      as a result of the Buy-In (including brokerage commissions, if any) exceeds
      the
      proceeds received by such Investor as a result of the sale to which such Buy-In
      relates. The Investor shall provide the Company written notice indicating the
      amounts payable to the Investor in respect of the Buy-In.



    
      
        
        

      

      
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    7.9 Subsequent
      Equity Sales.
      From
      the date hereof until such time as no Investor holds any of the Securities,
      the
      Company shall be prohibited from effecting or entering into an agreement to
      effect any Subsequent Financing involving a “Variable Rate Transaction”. The
      term “Variable Rate Transaction” shall mean a transaction in which the Company
      issues or sells (i) any debt or equity securities that are convertible into,
      exchangeable or exercisable for, or include the right to receive additional
      shares of Common Stock either (A) at a conversion, exercise or exchange rate
      or
      other price that is based upon and/or varies with the trading prices of or
      quotations for the shares of Common Stock at any time after the initial issuance
      of such debt or equity securities, or (B) with a conversion, exercise or
      exchange price that is subject to being reset at some future date after the
      initial issuance of such debt or equity security or upon the occurrence of
      specified or contingent events directly or indirectly related to the business
      of
      the Company or the market for the Common Stock or (ii) enters into any
      agreement, including, but not limited to, an equity line of credit, whereby
      the
      Company may sell securities at a future determined price.

    


    7.10 Proxy
      Statement; Stockholders Meeting; Filing of Amendment.
      (a)
      Promptly following the execution and delivery of this Agreement the Company
      shall take all action necessary to call a meeting of its stockholders (the
      “Stockholders Meeting”), which shall occur not later than December 2, 2008 (the
“Stockholders Meeting Deadline”), for the purpose of seeking approval of the
      Company’s stockholders for the Amendment (the “Proposal”). In connection
      therewith, the Company will promptly prepare and file with the SEC proxy
      materials (including a proxy statement and form of proxy) for use at the
      Stockholders Meeting and, after receiving and promptly responding to any
      comments of the SEC thereon, shall promptly mail such proxy materials to the
      stockholders of the Company. Each Investor shall promptly furnish in writing
      to
      the Company such information relating to such Investor and its investment in
      the
      Company as the Company may reasonably request for inclusion in the Proxy
      Statement. The Company will comply with Section 14(a) of the 1934 Act and the
      rules promulgated thereunder in relation to any proxy statement (as amended
      or
      supplemented, the “Proxy Statement”) and any form of proxy to be sent to the
      stockholders of the Company in connection with the Stockholders Meeting, and
      the
      Proxy Statement shall not, on the date that the Proxy Statement (or any
      amendment thereof or supplement thereto) is first mailed to stockholders or
      at
      the time of the Stockholders Meeting, contain any untrue statement of a material
      fact or omit to state any material fact necessary in order to make the
      statements made therein not false or misleading, or omit to state any material
      fact necessary to correct any statement in any earlier communication with
      respect to the solicitation of proxies or the Stockholders Meeting which has
      become false or misleading. If the Company should discover at any time prior
      to
      the Stockholders Meeting, any event relating to the Company or any of its
      Subsidiaries or any of their respective affiliates, officers or directors that
      is required to be set forth in a supplement or amendment to the Proxy Statement,
      in addition to the Company's obligations under the 1934 Act, the Company will
      promptly inform the Investors thereof.

    


    (b) Subject
      to their fiduciary obligations under applicable law (as determined in good
      faith
      by the Company’s Board of Directors after consultation with the Company’s
      outside counsel), the Company's Board of Directors shall recommend to the
      Company's stockholders that the stockholders vote in favor of the Proposal
      (the
“Company Board Recommendation”) and shall take all commercially reasonable
      action (including, without limitation, the hiring of a proxy solicitation firm
      of nationally recognized standing) to solicit the approval of the stockholders
      for the Proposal unless the Board of Directors shall have modified, amended
      or
      withdrawn the Company Board Recommendation pursuant to the provisions of the
      immediately succeeding sentence. The Company covenants that the Board of
      Directors of the Company shall not modify, amend or withdraw the Company Board
      Recommendation unless the Board of Directors (after consultation with the
      Company’s outside counsel) shall determine in the good faith exercise of its
      business judgment that maintaining the Company Board Recommendation would
      violate its fiduciary duty to the Company’s stockholders. Whether or not the
      Company's Board of Directors modifies, amends or withdraws the Company Board
      Recommendation pursuant to the immediately preceding sentence, the Company
      shall
      in accordance with applicable law and the provisions of its Articles of
      Organization and Bylaws, (i) take all action necessary to convene the
      Stockholders Meeting as promptly as practicable, but no later than the
      Stockholders Meeting Deadline, to consider and vote upon the approval of the
      Proposal and (ii) submit the Proposal at the Stockholders Meeting to the
      stockholders of the Company for their approval.



    
      
        
        

      

      
        -22-

        
          

        

      

      
        
        

      

    


    (c) Not
      later
      than two (2) Business Days after obtaining approval of the Proposal at the
      Stockholders Meeting, the Company shall file the Certificate of Amendment with
      the Secretary of the Commonwealth of Massachusetts which shall be as promptly
      as
      practicable after the filing thereof as permitted by applicable law. The Company
      shall notify the Investors in writing of the filing of the Certificate of
      Amendment as provided in the immediately preceding sentence not later than
      one
      (1) Business Day after such filing.

    


    7.11 Right
      to Participate in Future Financings.
      From
      the date hereof until 90 days after the Effective Date, upon any financing
      by
      the Company of its Common Stock or Common Stock Equivalents (a “Subsequent
      Financing”), each Investor shall have the right to participate in such
      Subsequent Financing as provided herein. At least seven (7) Business Days prior
      to the closing of the Subsequent Financing, the Company shall deliver to each
      Investor a written notice of its intention to effect a Subsequent Financing
      (“Pre-Notice”), which Pre-Notice shall ask such Investor if it wants to review
      the details of such financing (such additional notice, a “Subsequent Financing
      Notice”). Upon the request of an Investor, and only upon a request by such
      Investor, for a Subsequent Financing Notice, the Company shall promptly, but
      no
      later than one Business Day after such request, deliver a Subsequent Financing
      Notice to such Investor. The Subsequent Financing Notice shall describe in
      reasonable detail the proposed terms of such Subsequent Financing, the amount
      of
      proceeds intended to be raised thereunder, the Person with whom such Subsequent
      Financing is proposed to be effected, and attached to which shall be a term
      sheet or similar document relating thereto. Each Investor shall notify the
      Company by 5:00 p.m. (New York City time) on the fifth (5th) Business Day after
      their receipt of the Subsequent Financing Notice of its willingness to
      participate in the Subsequent Financing on the terms described in the Subsequent
      Financing Notice, subject to completion of mutually acceptable documentation.
      The Investors agreeing to participate in the Subsequent Financing shall have
      the
      right to purchase their Pro Rata Portion (as defined below) of the Common Stock
      or Common Stock Equivalents to be issued in such Subsequent Financing. “Pro Rata
      Portion” is the ratio of (x) the number of shares of Common Stock beneficially
      owned amount by such Investor (determined in accordance with Rule 13d-3 under
      the 1934 Act and (y) number of shares of Common Stock then outstanding
      (calculated on a fully diluted basis). Notwithstanding the foregoing, this
      Section 7.11 shall not apply in respect of the issuance of (a) shares of Common
      Stock or options to employees, consultants, officers or directors of the Company
      pursuant to any stock or option plan duly adopted by a majority of the
      non-employee members of the Board of Directors of the Company or a majority
      of
      the members of a committee of non-employee directors established for such
      purpose, shares of Common Stock issuable in respect of the Notes and the
      Warrants, and (c) securities upon the exercise of or conversion of any
      convertible securities, options or warrants issued and outstanding on the date
      of this Agreement, provided that the terms of such securities have not been
      amended since the date of this Agreement to increase the number of shares of
      Common Stock issuable thereunder or to lower the exercise or conversion price
      thereof.



    
      
        
        

      

      
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    7.12 Equal
      Treatment of Investors.
      No
      consideration shall be offered or paid to any Person to amend or consent to
      a
      waiver or modification of any provision of any of the Transaction Documents
      unless the same consideration is also offered to all of the parties to the
      Transaction Documents. For clarification purposes, this provision constitutes
      a
      separate right granted to each Investor by the Company and negotiated separately
      by each Investor, and is intended for the Company to treat the Investors as
      a
      class and shall not in any way be construed as the Investors acting in concert
      or as a group with respect to the purchase, disposition or voting of Securities
      or otherwise.

    


    7.13 Restructuring.
      The
      Company shall use commercially reasonable efforts (including a significant
      salary reduction for certain employees) to effect a cost restructuring that
      will
      reduce the net cash burn of the Company and its Subsidiaries to $500,000 or
      less
      for the fiscal year ending June 30, 2009. As part of that restructuring, the
      Company intends to amend its existing equity incentive plan (the “2006 Plan”) to
      increase the number of shares available to grant to key employees of, and
      consultants to, the Company and its Subsidiaries. Over the next 24 months the
      grants under the 2006 Plan and any other equity incentive plan adopted by the
      Company from time to time shall not cumulatively exceed 20% of the shares of
      Common Stock outstanding on the date hereof (calculated on a fully diluted
      basis).

    


    7.14 Use
      of
      Proceeds.
      The
      Company shall use the net proceeds of the sale of the Notes and the Warrants
      as
      provided in Section 4.7.

    


    8. Survival
      and Indemnification.

    


    8.1 Survival.
      The
      representations, warranties, covenants and agreements contained in this
      Agreement shall survive the Closing of the transactions contemplated by this
      Agreement.

    


    8.2 Indemnification.
      The
      Company agrees to indemnify and hold harmless each Investor and its Affiliates
      and their respective directors, officers, employees and agents from and against
      any and all losses, claims, damages, liabilities and expenses (including without
      limitation reasonable attorney fees and disbursements and other expenses
      incurred in connection with investigating, preparing or defending any action,
      claim or proceeding, pending or threatened and the costs of enforcement thereof)
      (collectively, “Losses”) to which such Person may become subject as a result of
      any breach of representation, warranty, covenant or agreement made by or to
      be
      performed on the part of the Company under the Transaction Documents, and will
      reimburse any such Person for all such amounts as they are incurred by such
      Person.



    
      
        
        

      

      
        -24-

        
          

        

      

      
        
        

      

    


    8.3 Conduct
      of Indemnification Proceedings.
      Promptly
      after receipt by any Person (the “Indemnified
      Person”) of notice of any demand, claim or circumstances which would or might
      give rise to a claim or the commencement of any action, proceeding or
      investigation in respect of which indemnity may be sought pursuant to Section
      8.2, such Indemnified Person shall promptly notify the Company in writing and
      the Company shall assume the defense thereof, including the employment of
      counsel reasonably satisfactory to such Indemnified Person, and shall assume
      the
      payment of all reasonable fees and expenses; provided,
      however, that
      the
      failure of any Indemnified Person so to notify the Company shall not relieve
      the
      Company of its obligations hereunder except to the extent that the Company
      is
      materially prejudiced by such failure to notify. In any such proceeding, any
      Indemnified Person shall have the right to retain its own counsel, but the
      fees
      and expenses of such counsel shall be at the expense of such Indemnified Person
      unless: (i) the Company and the Indemnified Person shall have mutually agreed
      to
      the retention of such counsel; or (ii) in the reasonable judgment of counsel
      to
      such Indemnified Person representation of both parties by the same counsel
      would
      be inappropriate due to actual or potential differing interests between them.
      The Company shall not be liable for any settlement of any proceeding effected
      without its written consent, which consent shall not be unreasonably withheld,
      but if settled with such consent, or if there be a final judgment for the
      plaintiff, the Company shall indemnify and hold harmless such Indemnified Person
      from and against any loss or liability (to the extent stated above) by reason
      of
      such settlement or judgment. Without the prior written consent of the
      Indemnified Person, which consent shall not be unreasonably withheld, the
      Company shall not effect any settlement of any pending or threatened proceeding
      in respect of which any Indemnified Person is or could have been a party and
      indemnity could have been sought hereunder by such Indemnified Party, unless
      such settlement includes an unconditional release of such Indemnified Person
      from all liability arising out of such proceeding.

    


    9. Miscellaneous.

    


    9.1 Successors
      and Assigns.
      This
      Agreement may not be assigned by a party hereto without the prior written
      consent of the Company or the Investors, as applicable, provided, however,
      that
      an Investor may assign its rights and delegate its duties hereunder in whole
      or
      in part to an Affiliate or to a third party acquiring some or all of its
      Securities in a transaction complying with applicable securities laws without
      the prior written consent of the Company or the other Investors. The provisions
      of this Agreement shall inure to the benefit of and be binding upon the
      respective permitted successors and assigns of the parties. Nothing in this
      Agreement, express or implied, is intended to confer upon any party other than
      the parties hereto or their respective successors and assigns any rights,
      remedies, obligations, or liabilities under or by reason of this Agreement,
      except as expressly provided in this Agreement.

    


    9.2 Counterparts;
      Faxes.
      This
      Agreement may be executed in two or more counterparts, each of which shall
      be
      deemed an original, but all of which together shall constitute one and the
      same
      instrument. This Agreement may also be executed and transmitted via facsimile,
      or by portable document format via electronic mail, each of which shall be
      deemed an original.



    
      
        
        

      

      
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    9.3 Titles
      and Subtitles.
      The
      titles and subtitles used in this Agreement are used for convenience only and
      are not to be considered in construing or interpreting this
      Agreement.

    


    9.4 Notices.
      Unless
      otherwise provided, any notice required or permitted under this Agreement shall
      be given in writing and shall be deemed effectively given as hereinafter
      described (i) if given by personal delivery, then such notice shall be deemed
      given upon such delivery, (ii) if given by telex or telecopier, then such notice
      shall be deemed given upon receipt of confirmation of complete transmittal,
      (iii) if given by mail, then such notice shall be deemed given upon the earlier
      of (A) receipt of such notice by the recipient or (B) three days after such
      notice is deposited in first class mail, postage prepaid, and (iv) if given
      by
      an internationally recognized overnight air courier, then such notice shall
      be
      deemed given one Business Day after delivery to such carrier. All notices shall
      be addressed to the party to be notified at the address as follows, or at such
      other address as such party may designate by ten days’ advance written notice to
      the other party:

    


    If
      to the
      Company:

    


    Precision
      Optics Corporation, Inc.

    22
      East
      Broadway

    Gardner,
      Massachusetts 01440-3338

    Attention:
      Richard E. Forkey,

    President,
      Chief Executive Officer and Treasurer

    Fax:
      (978) 630-1487

    


    With
      a
      copy to:

    


    Ropes
      & Gray LLP

    One
      International Place

    Boston,
      MA 02110

    Attention:
      Patrick O’Brien

    Fax:
      (617) 951-7050

    


    If
      to the
      Investors:

    


    to
      the
      addresses set forth on the signature pages hereto.

    


    9.5 Expenses.
      The
      parties hereto shall pay their own costs and expenses in connection herewith,
      except that the Company shall pay the reasonable fees and expenses of Lowenstein
      Sandler PC not to exceed $35,000, regardless of whether the transactions
      contemplated hereby are consummated; it being understood that Lowenstein Sandler
      PC has only rendered legal advice to the Special Situations Funds participating
      in this transaction and not to the Company or any other Investor in connection
      with the transactions contemplated hereby, and that each of the Company and
      each
      Investor has relied for such matters on the advice of its own respective
      counsel. Such expenses shall be paid upon demand. The Company shall reimburse
      the Investors upon demand for all reasonable out-of-pocket expenses incurred
      by
      the Investors, including without limitation reimbursement of attorneys’ fees and
      disbursements, in connection with any amendment, modification or waiver of
      this
      Agreement or the other Transaction Documents. In the event that legal
      proceedings are commenced by any party to this Agreement against another party
      to this Agreement in connection with this Agreement or the other Transaction
      Documents, the party or parties which do not prevail in such proceedings shall
      severally, but not jointly, pay their pro rata share of the reasonable
      attorneys’ fees and other reasonable out-of-pocket costs and expenses incurred
      by the prevailing party in such proceedings.



    
      
        
        

      

      
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    9.6 Amendments
      and Waivers.
      Any
      term of this Agreement may be amended and the observance of any term of this
      Agreement may be waived (either generally or in a particular instance and either
      retroactively or prospectively), only with the written consent of the Company
      and the Investors. Any amendment or waiver effected in accordance with this
      paragraph shall be binding upon each holder of any Securities purchased under
      this Agreement at the time outstanding, each future holder of all such
      Securities, and the Company.

    


    9.7 Publicity.
      Except
      as set forth below, no public release or announcement concerning the
      transactions contemplated hereby shall be issued by the Company or the Investors
      without the prior consent of the Company (in the case of a release or
      announcement by the Investors) or the Investors (in the case of a release or
      announcement by the Company) (which consents shall not be unreasonably
      withheld), except as such release or announcement may be required by law or
      the
      applicable rules or regulations of any securities exchange or securities market,
      in which case the Company or the Investors, as the case may be, shall allow
      the
      Investors or the Company, as applicable, to the extent reasonably practicable
      in
      the circumstances, reasonable time to comment on such release or announcement
      in
      advance of such issuance. No later than one Business Day following the Closing
      Date, the Company will publicly disclose the transactions contemplated hereby
      and, in connection therewith, will, no later than two Business Days following
      the Closing Date, file with the SEC either a Current Report on Form 8-K or
      a
      Quarterly Report on Form 10-QSB, to the extent permissible, which shall attach
      as exhibits copies of the Transaction Documents.

    


    9.8 Severability.
      Any
      provision of this Agreement that is prohibited or unenforceable in any
      jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
      such prohibition or unenforceability without invalidating the remaining
      provisions hereof but shall be interpreted as if it were written so as to be
      enforceable to the maximum extent permitted by applicable law, and any such
      prohibition or unenforceability in any jurisdiction shall not invalidate or
      render unenforceable such provision in any other jurisdiction. To the extent
      permitted by applicable law, the parties hereby waive any provision of law
      which
      renders any provision hereof prohibited or unenforceable in any
      respect.

    


    9.9 Entire
      Agreement.
      This
      Agreement, including the Exhibits and the Disclosure Schedules, and the other
      Transaction Documents constitute the entire agreement among the parties hereof
      with respect to the subject matter hereof and thereof and supersede all prior
      agreements and understandings, both oral and written, between the parties with
      respect to the subject matter hereof and thereof.



    
      
        
        

      

      
        -27-

        
          

        

      

      
        
        

      

    


    9.10 Further
      Assurances.
      The
      parties shall execute and deliver all such further instruments and documents
      and
      take all such other actions as may reasonably be required to carry out the
      transactions contemplated hereby and to evidence the fulfillment of the
      agreements herein contained.

    


    9.11 Governing
      Law; Consent to Jurisdiction; Waiver of Jury Trial.
      This
      Agreement shall be governed by, and construed in accordance with, the internal
      laws of the State of New York without regard to the choice of law principles
      thereof (other than Section 5-1401 of the New York General Obligation Law).
      Each
      of the parties hereto irrevocably submits to the exclusive jurisdiction of
      the
      courts of the State of New York located in New York County and the United States
      District Court for the Southern District of New York for the purpose of any
      suit, action, proceeding or judgment relating to or arising out of this
      Agreement and the transactions contemplated hereby. Service of process in
      connection with any such suit, action or proceeding may be served on each party
      hereto anywhere in the world by the same methods as are specified for the giving
      of notices under this Agreement. Each of the parties hereto irrevocably consents
      to the jurisdiction of any such court in any such suit, action or proceeding
      and
      to the laying of venue in such court. Each party hereto irrevocably waives
      any
      objection to the laying of venue of any such suit, action or proceeding brought
      in such courts and irrevocably waives any claim that any such suit, action
      or
      proceeding brought in any such court has been brought in an inconvenient forum.
      EACH
      OF THE PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY
      LITIGATION WITH RESPECT TO THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS BEEN
      CONSULTED SPECIFICALLY AS TO THIS WAIVER.

    


    9.12 Independent
      Nature of Investors' Obligations and Rights.
      The
      obligations of each Investor under any Transaction Document are several and
      not
      joint with the obligations of any other Investor, and no Investor shall be
      responsible in any way for the performance of the obligations of any other
      Investor under any Transaction Document. The decision of each Investor to
      purchase Securities pursuant to the Transaction Documents has been made by
      such
      Investor independently of any other Investor. Nothing contained herein or in
      any
      Transaction Document, and no action taken by any Investor pursuant thereto,
      shall be deemed to constitute the Investors as a partnership, an association,
      a
      joint venture or any other kind of entity, or create a presumption that the
      Investors are in any way acting in concert or as a group with respect to such
      obligations or the transactions contemplated by the Transaction Documents.
      Each
      Investor acknowledges that no other Investor has acted as agent for such
      Investor in connection with making its investment hereunder and that no Investor
      will be acting as agent of such Investor in connection with monitoring its
      investment in the Securities or enforcing its rights under the Transaction
      Documents. Each Investor shall be entitled to independently protect and enforce
      its rights, including, without limitation, the rights arising out of this
      Agreement or out of the other Transaction Documents, and it shall not be
      necessary for any other Investor to be joined as an additional party in any
      proceeding for such purpose. The Company acknowledges that each of the Investors
      has been provided with the same Transaction Documents for the purpose of closing
      a transaction with multiple Investors and not because it was required or
      requested to do so by any Investor.

     

    [signature
      page follows]


    
      
        
        

      

      
        -28-

        
          

        

      

      
        
        

      

    

    


    IN
      WITNESS WHEREOF, the parties have executed this Agreement or caused their duly
      authorized officers to execute this Agreement as of the date first above
      written.

    


    
      	
              The
                Company:

            	
              PRECISION OPTICS CORPORATION

            
	 	 
	 	
              By:

            	/s/
              Richard E. Forkey
	 	
              Name:
                Richard E. Forkey

            
	 	
              Title: President, Chief Executive Officer and Treasurer

            


    


    
      
        
        

      

      
        -29-

        
          

        

      

      
        
        

      

    

    


    
      	
              The
                Investors:

            	
              SPECIAL SITUATIONS FUND III QP, L.P.

            
	 	 
	 	
              By:

            	/s/
              Austin W. Marxe
	 	
              Name:
                Austin W. Marxe

            
	 	
              Title:
                General Partner

            


    

    


    Aggregate
      Purchase Price: $275,000

    Principal
      Amount of Notes: $275,000

    Number
      of
      Warrants: 3,630,000

    


    
      	
              Address
                for Notice:

            	 
	 	
              527
                Madison Avenue

            
	 	
              Suite
                2600

            
	 	
              New
                York, NY 10022

            
	 	 
	 	
              with
                a copy to:

            
	 	 
	 	
              Lowenstein
                Sandler PC

            
	 	
              65
                Livingston Avenue

            
	 	
              Roseland,
                NJ 07068

            
	 	
              Attn:
                John D. Hogoboom, Esq.

            
	 	
              Telephone:  
                973.597.2500

            
	 	
              Facsimile:     
                973.597.2400

            


    

    


    
      	
              SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P.

            
	 
	
              By:

            	/s/
              Austin W. Marxe
	
              Name:
                Austin W. Marxe

            
	
              Title:
                General Partner

            


    

    


    Aggregate
      Purchase Price: $275,000

    Principal
      Amount of Notes: $275,000

    Number
      of
      Warrants: 3,630,000

    


    
      	
              527
                Madison Avenue

            
	
              Suite
                2600

            
	
              New
                York, NY 10022

            
	 
	
              with
                a copy to:

            
	 
	
              Lowenstein
                Sandler PC

            
	
              65
                Livingston Avenue

            
	
              Roseland,
                NJ 07068

            
	
              Attn:
                John D. Hogoboom, Esq.

            
	
              Telephone:
                973.597.2500

            
	
              Facsimile:
                973.597.2400

            


    

     

    
      
        
        

      

      
        -30-

        
          

        

      

      
        
        

      

    

     

    
      	
              /s/
                Arnold Schumsky

            
	
              Arnold
                Schumsky

            


    

    


    Aggregate
      Purchase Price: $50,000

    Principal
      Amount of Notes: $50,000

    Number
      of
      Warrants: 660,000

    


    Address
      for Notice:


    
      
        
        

      

      
        -31-